Michael Dickstein and David Chan's paper on Medicare forthcoming on the Quarterly Journal of Economics

July 14, 2020

The American Medical Association’s Relative Value Scale Update Committee (RUC) has been called “the most important health-care group you’ve never heard of.”  When Medicare needs to set a price for a new or existing procedure, it turns to the physician committee for advice on the relative value of the procedure. RUC recommendations influence the annual $70 billion in Medicare spending and half a trillion dollars in other public and private spending for physician services that generally follow Medicare’s pricing decisions.  

Using data from the RUC’s internal deliberations from its inception in 1992 through 2013, we investigate how the identities of physician specialties on the RUC affects the recommendations it sends to Medicare. We find that affiliated medical specialties – those specialties that perform medical services similar to services performed by the specialties on the RUC – receive higher values and prices for their proposals. Specifically, a standard deviation increase in the degree of affiliation would increase pricing recommendations by 10%.    

Given this finding of bias in recommendations, why would Medicare invite input from the RUC when it chooses prices? We provide evidence suggesting that allowing even a biased committee’s input may nonetheless improve the quality of information used in Medicare’s price setting. Specifically, we compare private insurers’ prices to Medicare’s prices for the same physician services.  We observe that private sector prices do adjust in relation to changes in Medicare’s price schedule, and the degree of “price following” is stronger for services whose prices were decided by a more affiliated committee.  This evidence suggests the information content of prices is higher when prices originate from a more affiliated committee. However, the private sector does also appear to anticipate potential bias; in our data, private insurers discount prices coming from a more affiliated RUC.    

Michael Dickstein is an Assistant Professor of Economics at NYU Stern.
Read the full paper here.